Management is guiding for loan growth of 8-10% in 2019, lower than the 12% expected in 2018 (3Q18: 17% yoy). It remains conservative on growth due to its expectation of higher rates in 2019 (+150-200bp – quite steep in our view), which may result in slower loan growth. Corporate remains the main driver, followed by commercial/SME. Consumer loan (mortgage and 4W) will be relatively slower as it’s more sensitive to rate adjustment.

Focusing on digitalisation to solidify CASA leadership

Expanding the CASA base will be the main priority – the CASA ratio has continued to improve to 78% in 3Q18 from 76% in 3Q17, which we attribute to its funding franchise and digitalisation initiatives this year (introduction of QR-code transfer, features upgrade on digital business banking channels). Through digitalisation, it aims to double its customer base to 36m in 3-5 years. This should solidify its franchise in low-cost funding and better its fee-based income outlook.

Higher NIM guidance amid expectation of higher rate environment

BBCA is guiding for a higher NIM in 2019 because of its internal expectation of higher rate. We concur with the management that it will be the prime beneficiary of such rate increase due to: 1) stable cost of funds (78% CASA ratio with CASA cost of 0.9%), 2) ample liquidity (85% LDR in 3Q18, the lowest among big banks) and favorable repricing profile on its asset side. We estimate BBCA’s NIM to expand by 30-40bp in 2019 if the rates are increased by 150-200bp next year.

Resilient asset quality

BBCA is guiding for a slight uptick in NPL next year (1.4-1.6% in 2019 vs. 1.4% in 3Q18 – still the lowest among big banks) due to force majeure in Palu (tsunami in Oct). It also guided for a slightly higher credit costs of 0.6% in 2019 (we expect c.0.4-0.5% in 2018) from additional provisions related to this portfolio. Nonetheless, it remains confident that the impact of higher interest rates on asset quality will be relatively minimal.

Maintain Hold due to valuations

Maintain Hold mainly due to valuation reasons. BBCA has outperformed its peers by c.22% YTD, now trading at 3.7x 2019 P/BV (ex-asset revaluation), above 10-year average of 3.4x P/BV. Main re-rating catalysts are stronger than market deposit growth and margin. Risk is worse than expected asset quality.

Normalising growth in 2019, corporate to be the key driver

Management is guiding for loan growth of 8-10% in 2019, lower than the 12% expected in 2018 (3Q18: 17% yoy). It remains conservative on growth as it expects higher rates in 2019 (+150-200bp – which is quite steep, in our view), which may result in slower loan growth.

Corporate is expected to be the main driver of loan growth, followed by commercial/SME. Consumer loans (mortgage and 4W) will be sluggish in 2019 as it is more sensitive to interest rates